The New York Mercantile Exchange hopes that the impending start of side-by-side trading of its full-size and miNYs energy contract in its pit and on the CMEâs Globex platform will give an added lift to its already record volumes.

While successful, Nymex needs to defend its turf as it faces heated competition from the electronic IntercontinentalExchange, whose London market, ICE Futures - the home of the Brent crude futures contract - has marched from record to record as well. Since it started electronic trading of WTI crude futures contracts similar to Nymex’s flagship product in February, ICE Futures has been gaining market share, setting a new high of 157,009 WTI contracts on May 9. On that day, Nymex traded 342,000 WTI contracts, which underscores a fierce rivalry in a contract it once controlled.

Nymex Holdings, the parent company that is mulling an initial public offering, must justify the lofty valuation that the leading energy market is expected to command. In the first quarter, Nymex reported record net profits of $33.6m (€26.2m), as soaring interest in energy as well as precious metals pushed its daily average trading volume above 1 million contracts.

Based on what General Atlantic paid in March for a 10% stake in the exchange, Nymex is worth $1.6bn. But the investment group will pay an additional $10m if the IPO takes place this year and values the exchange at $2bn or more.

To fulfill this tall order, Nymex is betting that electronic trading will boost trading in its crude oil, natural gas, heating oil and gasoline contracts as new market participants, from hedge funds to foreign proprietary traders, take advantage of Globex’s global direct-access functionality.

Nymex president James Newsome summed up the merits of the alliance, saying: “The future of Nymex will be shaped by its pairing with the CME to provide futures markets participants the best of both worlds, while significantly expanding access to NYMEX energy contracts through the CME Globex global distribution network.”

Energy on Globex

Trading energy products on Globex is not new for Nymex. Until last year, its miNYs oil and gas contracts were doing well on the CME platform.

According to a source close to the negotiations, the CME, which had spoken about its own ambitions to trade red-hot energy products, showed little interest in renewing the contract. Pressured by ICE Futures’ encroachment on its own turf, Nymex went back to the negotiating table and agreed on a new contract that serves the strategies of the two exchanges well and will run until 2016.

The CME gets to host trading not only in the miNYS but the full-size contracts, scheduled to come online on June 12. According to one source, even a mighty exchange like the CME realized that it would be difficult to launch a third energy futures market. Plus, starting in the third quarter, Globex will also host trading in Nymex’s equally hot precious metals contracts.

For Nymex, the CME provides a proven and reliable technology that can rival ICE’s platform and help launch side-by-side trading with its pit.
Nymex contracts on Globex will be cash-settled and cleared by Nymex.

The rivalry with ICE could not be more serious, with the world as the potential stage for the clash of the two energy giants.

ICE, which runs a global over-the-counter trading platform from Atlanta, just opened a Singapore telecommunications hub to improve access and lower connectivity costs for market participants in Asia. This adds to the hubs ICE already set up in continental Europe, London and Chicago while a fifth one is planned for New York in June.

The CME already opened a communications hub in Singapore last year, adding to seven others already in place in Amsterdam, Dublin, Frankfurt, Gibraltar, London, Milan and Paris, which gives Nymex access to a wide potential customer base.

Nymex also just opened an office in Singapore to develop the exchange’s presence in the Asia-Pacific region.

High stakes

Much is at stake in energy trading, as is in the oil market. While Nymex mulls an IPO, ICE ponders a secondary offering and the CME is always on the lookout for strategic acquisitions.

Jeffrey Sprecher, chairman and chief executive of ICE, told investors when announcing first-quarter results earlier this month: “We are still in discussions with the shareholders, but may be holding a secondary offer in the near future.”

ICE founding shareholders have since agreed on a new lock-up agreement
“in anticipation of the company’s filing of a registration statement for a possible secondary offering to be conducted on behalf of these shareholders later this summer.” However, the plan must proceed by June 16 or be void.

ICE went public last November in a $416 million IPO where its shares were priced at $26 and now trades around $60. To fuel growth, the group has been adding new products on both its OTC platform and its London exchange.

Nymex, for its part, has been far from idle on the international scene. It has entered into a joint-venture agreement with Tatweer Dubai to form DME Holdings, the parent of the Dubai Mercantile Exchange, which will be the oil-producing region’s first crude oil exchange, starting in the fourth quarter. All trades executed on the DME will be guaranteed and cleared through Nymex’s clearinghouse.

The battle between the two oil trading powerhouses is also raging on the legal front. Nymex has sued ICE since November 2002, claiming copyright infringement of Nymex WTI settlement prices. But a New York court dismissed the claim, a ruling that Nymex said it is set to appeal.

Nymex’s success on Globex may play a critical role for the CME down the road. The wealthy exchange has been very careful about not squandering its good fortune but is opened to merger talks in strategic areas. If Nymex energy or precious metals contracts are a roaring success on Globex, and the pit appears to be losing its prestige, the CME might be ready to make an offer to its customer.

When asked whether merger talks with Nymex could eventually be in the cards, CME chief executive Craig Donohue left the door open: “Needless to say, it is always good to maintain excellent relations with other organizations that present the potential for consolidation.”

Last year, the CME beefed up its corporate development unit by appointing two co-heads of the division to focus on strategic planning.